Category Archives: inflation
Today’s M4 money supply announcement: 18.8% year on year. That’s a huge increase in money sloshing around.
The real figure for inflation is the difference between money supply growth and growth in the real economy. But the latter is negative: -2.8% projected by IMF. That makes the annual rate of inflation 21.6%.
With politically-distorted interest rates around 20% lower than that (-20% real interest), it’s no wonder noone wants to lend money!
Our powers-that-be have invoked deflation as a kind of ultimate economic bogeyman. Prices fall, so people don’t spend, but wait to buy cheaper. Economy grinds to a halt.
Can we find any evidence to test that theory? Actually, it’s very easy. Look anywhere in electronics. WebThing’s first desktop computer cost about £2000. About 10 years later, its current replacement was in the region of £200, not to mention more powerful by a yet bigger margin. Computers have been falling in price for 30 years. Other electronics, such as phones or home entertainment kit, show similar patterns.
So which electronic industries have been choked by this “deflation”? Apple? Nokia? Sony? But you don’t need me to list a whole bunch of global giants.
And in recent years, we’ve had lots of other price falls due to globalisation and cheap imports: the rapid rise of Asian countries, most recently China. Clothes, for example, are cheaper than a few years ago not only because we have Primark, but also in staid and conservative M&S.
The problem they’re scared of isn’t falling prices, it’s falling consumption. Or in an economy reliant on growth, even static consumption. So we must consume ever more. Consumption grows above income, so we have to borrow. Over time, the borrowing grows into a bubble that can never be repaid, leaving the lenders to take heavy losses. But we can’t stop borrowing ever more against illusory future income, because then we stop spending, and that’s the bogeyman deflation.
That’s where we are now. And there’s no way out.
Printing money won’t help: you haven’t added anything to the real economy, you’ve just debased it. More borrowing won’t help, when the only people who want to borrow are those who’ll never repay. More lending won’t help in a saturated market.
We have deflation, because a bubble is deflating. At the same time we have inflation, which the government is desperately trying to raise higher. And we have the bottom line: even when we’ve push inflation up to 1970s crisis levels (above 20%), we’ll still have the deflation. Because it’s not, nor ever was, about consumer prices!
Someone should explain biflation to our powers-that-be.
‘Absolutely horrendous’? Or absolutely predictable?
The first is an economist quoted by the BBC, on the subject of today’s producer price figures – one element in our rising inflation. The second is, well, me (e.g. here, here) and anyone else with basic numeracy.
In basic commodities (though not yet in manufactured goods, thanks to China), we have regression to the mean: the return of something closer to normality after a period in which prices were artificially low. In the case of food and energy, that’s no mere economic cycle but a generational period. As of now, rising food and energy prices are getting the lions share of the blame. International factors make a good scapegoat when the more important factors are what the late Douglas Adams called Somebody Else’s Problem.
But we’re missing the monetarists’ basic lesson. Printing more money doesn’t create more value, and increasing the money supply will fuel inflation, unless there’s something real and new to spend that extra money on. Pouring billions into subsidised housing, Northern Rock, and now the banking system at large, doesn’t create extra value, so it can only fuel inflation.
And then there’s the housing crash, which has finally begun in spite of yet more government money to prop up prices. Real-world interest rates are rising in spite of the Bank of England, and have a long way to go before they re-align with debt levels (after all, it was Gordon Brown paying off the national debt in the Prudence years that enabled rates to come down from double-digits to their boom-years values).
No government dares not bail out their articulate, well-represented middle classes. So there will be more tax, more downward pressure on the pound, and much more inflation, to help shift the great bulk of the burden from the established powerful but over-borrowed to the hapless hard-working.
Here’s an easy solution, if they’d dare be honest about it. Include house prices in inflation figures. That gives a measure of inflation as it affects those of us who are not so rich as to own property. And the good news is that after years of hyperinflation, it’s finally falling!
After a month of appearing sensible, the Bank of England appears to have caved in and bailed out not just one bank’s depositors, but the banking system as a whole. More proof – if it were ever needed – that the prudence years are long gone. We’ll inflate our way out of letting the city bankers – and indeed multiple-home-owners – face the consequences of their gambling.
Whether or not this could be fixed using interest rates is now immaterial. They’re not even going to try. Expect some smoke-and-mirrors over the coming months, to pre-empt and limit the damage to headline rates.
Worst, pumping more money in will only prolong our housing bubble. The major cause of it was oversupply of mortgage money, aided by smaller amounts of public money.
Poor old prudence. And poor taxpayer.